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Indo Gulf: Solid Performance

Oct 21, 2002

Indo Gulf Corporation Ltd. (IGCL) has reported another quarter of solid performance. Despite global economy weakening leading to reduced demand and softer commodity prices, the company has reported healthy financial perforamnce for quarter ended September '02. Having said that, sales growth has declined, as compared to the previous two quarters.

(Rs m)2QFY022QFY03Change1HFY021HFY03Change
Net Sales 6,937 7,937 14.4% 12,749 15,082 18.3%
Other Income 125 113 -9.3% 220 244 11.1%
Expenditure 5,401 6,163 14.1% 10,005 11,891 18.8%
Operating Profit (EBDIT) 1,536 1,774 15.5% 2,744 3,191 16.3%
Operating Profit Margin (%)22.1%22.4%21.5%21.2%
Interest 347 226 -34.8% 634 463 -27.0%
Depreciation 289 316 9.3% 601 632 5.2%
Profit before Tax 1,025 1,345 31.2% 1,729 2,340 35.3%
Tax 262 315 20.0% 462 628 35.9%
Profit after Tax/(Loss) 762 1,030 35.1% 1,267 1,712 35.1%
Net profit margin (%)11.0%13.0%9.9%11.4%
No. of Shares (eoy) (m) 225 225 225 225
Diluted Earnings per share 18 15
P/E Ratio 3.0

Growth in copper division sales, as over the past few quarters, has been driven by higher volumes. The company has been augmenting copper production over the past 15 months. In FY02, the company augmented capacity by 50% to 150,000 tonnes per annum (TPA). Production for 2QFY03 increased by an estimated 1.1% QoQ to 46,000 tonnes implying an annualised operating rate of 122%. Sales during sixth months ended September '02 have been driven by exports, which are higher by an estimated 121% YoY. Domestic copper industry is estimated to have registered flat to negative growth for 2002 year-to-date. Demand for Jelly Filled Telecom Cables (JFTC), constituting largest share of copper demand, is experiencing a slump, as telecom service/infrastructure providers shift to optical fibres. However, Indo Gulf has registered positive growth in domestic sales.

That said, poor monsoons in 2002 are likely to have reflected on fertiliser division performance. Agriculture output -- Khariff production -- is reported to be lower by 18% YoY. Consequently, fertiliser sales are also have been impacted. The same is reflected by significant increase in fertiliser inventory for 1HFY03. That said, the company enjoys significant brand equity in fertiliser business due to the 'Shaktiman' brand.

The company has been able to steady operating performance, as compared to the previous two quarters, which registered considerable drop in margins. Despite the continuing challenging environment, the company has managed to protect margins in 2QFY03. Contrary to perception, spot copper prices on London Metal Exchange (LME) for quarter ended September '02 were higher by 3% YoY at 1,518/ tonne. The company, however, undertakes approximately 85% of transactions in futures market. Average spot prices in 1QFY03 were healthier at 1,610/ tonne. Consequently, future contracts are likely to have enabled the company to protect margins. Having said that, the management has indicated that with demand for copper sliding, miners are shutting operations, which is tightening the market for copper concentrate.

The company maintains that unfavourable duty structure on gold and silver has led to reduced production of precious metals. Savvy treasury operations have enabled the company to reduce interest income. With declining interest rates, the company is likely have refinanced debt. Higher operating profits and lower interest costs have facilitated the rise in pre-tax profits.

At Rs 46 the scrip is trading on a multiple of only 3x 1HFY03 annualised earnings. The stock rose from Rs 33 levels in October '01 to Rs 65 levels in July '02 before declining to current levels. Hindalco Industries Ltd. and Indo Gulf announced a business restructuring plan in July '02. As per plan, the copper, DAP, precious metals and jetty operations will be acquired by Hindalco. While the fertiliser business will be transferred to a new company Indo Gulf Fertilisers (IGF). The deal has been finalised at 1 share of Hindalco for every 12 shares in Indo Gulf. Additionally, shareholders will receive 1 share in IGF for every 5 shares in IGCL. The scheme of arrangement is pending approval from the Mumbai and Allahabad High Court. Given the fixed share swap, the stock is likely to continue to mirror the stock performance of Hindalco.

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